Ultimate Bankruptcy & Federal Tax Workshop...6/17/2021 2 Schedule Day 1 June 16th 11am – 2pm Eastern 10-minute break every hour Day 2 June 17th 11am – 2pm Eastern 10-minute break

6/17/2021

1

Ultimate Bankruptcy & Federal Tax Workshop

Day Two

©2021 Tax Mentor Group, LLC dba Tax Mentor All Rights Reserved

CE & CPE Credit

©2021 Tax Mentor Group, LLC dba Tax Mentor All Rights Reserved 2

Answer Polling Questions

Must be logged in for duration of the presentation

A Link to receive your certificate will be sent at the end of the Workshop

Run into trouble? Track your answers using Questions BoxEmail [email protected]

1

2

6/17/2021

2

Schedule

Day 1June 16th 11am – 2pm Eastern10-minute break every hour



©2021 Tax Mentor Group, LLC dba Tax Mentor All Rights Reserved 3

IRS AcronymsIf there is an acronym you do not understand Google: “irs glossary section 1”


3

4

6/17/2021

3

Acronyms Used in Presentation


ACRONYM MEANING CONTEXT

CSED Collection Statute Expiration Date

The IRS has a limited time to collect a tax debt, starting 10 years from the date of assessment (plus tolling events). The CSED is the date the debt is no longer legally enforceable.

H&U Housing & UtiltiesShorthand term to denote total cost of Housing & Utilities, usually in reference to the taxpayer being over standards.

IRC Internal Revenue Code

Title 26 of the United States Code (USC). 1st Promulgated in 1939 the IRC is the body of law which codifies all federal tax laws.

IRM Internal Revenue Manual

The IRM is the primary, official source of "instructions to staff" that relate to the administration and operation of the IRS. It details the policies, delegations of authorities, procedures, instructions and guidelines for daily operations for all IRS organizations

MDI Monthly Disposable IncomeRefers to net household/taxpayer income after all allowable (i.e. reasonable & necessary) expenses are accounted for.

NFTL Notice of Federal Tax LienIRS files a tax lien at the county clerk of office to serve as public notice of the tax debt. Carries Collection Due Process Appeal Rights

OIC Offer in CompromiseOIC is the debt settlement program offered by the IRS. Acceptable amount is determined by the RCP, therefore each taxpayer will be unique.

PPIA Partial Pay Installment AgreementAn Installment Agreement (IA) which by its current terms is incapable of full paying the taxes within the CSEDs.

Technology Problems - Presenter

All sessions will be recorded locally.

If presenter’s internet drops out we have two alternatives.1. Will attempt to work off an air card and cell phone.2. A second location with stable internet if needed but there would be a 30-minute delay while I switch.

If your internet drops or becomes unusual, try to resolve the issue. The session is recorded and will be made available as soon as possible (maybe even same day). Recordings do not have credit.Alternatively you can call in and listen and view slides locally, answer polling questions via email ([email protected])


5

6

6/17/2021

4

Technology Problems – Attendees


Problem's logging into Go To WebinarE-Mail: [email protected]

Problems with THS Calculator

Phone 404-910-3605E-Mail: [email protected]

Morgan King, EsqThe Morgan King CompanyKing Law Publishing In private practice since 1972 – almost 50 years of Experience! Author of 7 practice books for professionals. Chairman of city of Dublin Planning Commission - 8 years Recipient of NACBA's Distinguished Service Award, and NACBA'S Attorney of the Month

award.

I have attended Morgan King’s trainings and I learned a lot about bankruptcy from his materials. On Day Two Morgan will be doing a short presentation about Morgan’s classes and materials. If you are an attorney or just want to learn more about bankruptcy this is great legal training.

I absolutely recommend at a minimum buying King’s Discharging Taxes in Consumer Bankruptcy Cases. Morgan does have a package he is offering for 25% off for attendees of this seminar.

8©2021 Tax Mentor Group, LLC dba Tax Mentor All Rights Reserved

7

8

6/17/2021

5

Handout Overview Presentation Slides Tax Bankruptcy Discharge Flow Chart IRS Memo on pre-SFR Assessment Original Tax Return


Presentation OverviewThis presentation will cover how to calculate the bankruptcy Federal Tax discharge dates as well as was an original return filed and if so was it timely. This course will also discuss the Beard Test and the McCoy Ruling and how they can impact the dischargeability of Federal Tax.

Presentation Note: Giving advice on bankruptcy is generally classified as legal advice. Tax professionals should have a relationship with a bankruptcy attorney who should talk to the client. This class is not providing legal training.


9

10

6/17/2021

6

Day 2 Presentation OutlineReview

Bankruptcy Basics

• Secured and unsecured debt.

• Priority and non-priority debt.

• Dischargeable and non-dischargeable taxes.

Case Law

• Beard• McCoy

Discharge Dates

• Learn how to calculate the federal tax bankruptcy discharge dates.

Decision Making

• How to review the taxpayers IRS information to assist with the dischargeabilitydecision.


Polling Question #1


11

12

6/17/2021

7

Chapter 7, Chapter 11 and Chapter 13


• Liquidates assets and then pays off creditors based on priority and non-priority debt.

Chapter 7 Bankruptcy is a liquidation bankruptcy.Chapter 7 Bankruptcy is a liquidation bankruptcy.

• The debt is organized into a payment plan and payments are made based on priority.

• Non-Priority income tax debt is dischargeable at the end of the Chapter 13.• There is a debt limit. $394,725 in unsecured debt/$1,184,200 in secured debts.

• These figures adjust periodically to reflect changes in the consumer price index.

Chapter 13 Bankruptcy is a reorganization bankruptcy.Chapter 13 Bankruptcy is a reorganization bankruptcy.

Note: Income Taxes can be discharged in both Chapter 7, 11, & 13 Bankruptcies.

14

Dischargeability Chart

Secured•NFTL filed

Un-Secured•No NFTL filed

PriorityNon-Dischargeable•Less than 3 years since due date, OR...•Less than 240 days since assessment.

Non-Priority•More than 3 years since due date, AND...•More than 240 days since assessment.

Non-PriorityNon-Dischargeable•Less than 2-years since late filed return, OR...•Tax Fraud, OR...•Willful Evasion.

Non-PriorityDischargeable•More than 2-years since late filed return, AND...•No Tax Fraud, AND...•No Willful Evasion.

Federal Tax Debt

13

14

6/17/2021

8

Secured Debt IRS creates secured debt with a properly filed Notice of Federal Tax Lien

(NFTL). Valid NFTL must identify taxpayer, tax year, assessment, and release date--

Treas. Reg. § 301.6323-1(d)(2) Rules for proper place to file NFTL vary by state.

Unsecured tax debt is all other debt than defined above.


What is Priority Tax Debt

Priority debt in bankruptcy determines what order debt is paid. Priority gets paid ahead of non-priority. Secured debt is usually tied to equity in an asset. Priority tax debt is not dischargeable.


15

16

6/17/2021

9

Determining If Tax Debt Is Priority


3-Year Rule

• The taxes were due at least three years before the bankruptcy filing including valid extensions.

240-Day Rule

• The tax was assessed at least 240 days prior to the filing.

There are two criteria or tests to determine if income taxes are priority

If it fails either one of these tests it is priority debt

What is Dischargeable and Non-Dischargeable Tax Debt This applies to Tax debt that qualifies as Non-Priority. If a tax debt is not priority and it qualifies as dischargeable then

it is possibly dischargeable.


17

18

6/17/2021

10

Dischargeable Vs Non-Dischargeable Taxes


3-Year Rule

•The taxes were due at least three years before the bankruptcy filing including valid extensions.

2-Year Rule

•The tax return was filed at least 2 years before the filing.

240-Day Rule

•The tax was assessed at least 240 days prior to the filing.

No Tax Fraud

•Tax fraud was not committed.

Willful Evasion

•No willful evasion.

There are five criteria or tests to determine if income taxes are dischargeable

Polling Question #2


19

20

6/17/2021

11

Priority Vs Dischargeability Priority defines the order in which the debt is paid back in comparison to

other debts. Dischargeability defines if the debt is dischargeable. Many tax and bankruptcy professionals believe Priority and Dischargeability

are the same, but they are not.

It is impossible to have a priority dischargeable debt. Since they both share the 3-Year Rule and 240-Day Rule if they fail for

one they fail for both. (Probably some crazy legal exception out there).


22

Dischargeability Chart

Secured•NFTL filed

Un-Secured•No NFTL filed

PriorityNon-Dischargeable•Less than 3 years since due date, OR...•Less than 240 days since assessment.

Non-Priority•More than 3 years since due date, AND...•More than 240 days since assessment.

Non-PriorityNon-Dischargeable•Less than 2-years since late filed return, OR...•Tax Fraud, OR...•Willful Evasion.

Non-PriorityDischargeable•More than 2-years since late filed return, AND...•No Tax Fraud, AND...•No Willful Evasion.

Federal Tax Debt

21

22

6/17/2021

12


Layman’s Tolling DefinitionEquitable Tolling Definition: Equitable tolling is a legal principle evolved from the common law of equity. Equitable tolling states that the statute of limitations will not bar a claim if the plaintiff, despite reasonable care and diligent efforts, did not discover the injury until after the limitations period had expired.

Layman’s: Tolling is an extension of time.

Example if the three-year rule is “tolled” for a Collection Due Process Hearing it basically means the 3-year rule is “extended” for the term of the tolling account.


23

24

6/17/2021

13

Tolling Event = Extension

25

A better way to describe tolling is that it EXTENDS a statutory or bankruptcy rule time period.

For example a CDP Hearing would toll the 3-Year Rule and 240-Day Rule for the duration of the CDP plus 90 days.


Bankruptcy Tolling Events

26

Tolling Event 3-Yr Rule 2-Yr Rule 240-Day Rule Additional Days

Prior Bankruptcy Yes No Yes 90

Collection Due Process Hearing Yes No Yes 90

Offer in Compromise No No Yes 30

Presentation Note: Be advised courts could make new rulings that could expand or contract equitable tolling. For example, a court could rule equitable tolling could be applied to the 2-Year Rule.


25

26

6/17/2021

14

Collection Due Process TollingCDP starts on 1/1/2018 and ends on 6/1/2018.

Bankruptcy tolling: 151 days + 90 additional days = 241 days


Polling Question #3


27

28

6/17/2021

15

Prior Bankruptcy TollingPrior bankruptcy starts on 1/1/2018 and ends on 6/1/2018.



Offer in Compromise Tolling Offer In Compromise (OIC) tolling is different for bankruptcy than it is for

CSED tolling. In bankruptcy the OIC tolls from pending date to the rejected date plus

30 days, or If the OIC is accepted then it tolls from the pending date through the

duration of the OIC whether it is completed successfully (including the five-year compliance time frame) or the default date plus 30 days.

To clarify the CSED OIC tolling is only from pending to accepted or rejected not the duration (plus 30 days for a rejected OIC).

Offers in compromise made prior to the assessment do not toll the 240-Day period.


29

30

6/17/2021

16

Denied Offer in Compromise Tolling ExampleOIC starts (pending) on 1/1/2018 and ends (rejected) on 6/1/2018.



Accepted Offer in Compromise Tolling Example

OIC starts (pending) on 1/1/2018 and ends (accepted) on 6/1/2018. Taxpayer then fails to comply within the 5-year compliance period on 6/1/2020.



31

32

6/17/2021

17

Start Bankruptcy Rules Time Frames


3-Year Rule

• Due date or extended due date.

2-Year Rule

• Late return filed date.

240-Day Rule

• Same as CSED it begins with the assessment.

Start Of Tolling Events


The tolling event starts and ends (including additional days) before the CSED/Bankruptcy time frame.

• This scenario does not toll.

The tolling event starts before the CSED/Bankruptcy time frame begins, but it ends (including the additional days) after the CSED/Bankruptcy time frame begins.

• This scenario only tolls for the amount of time the two events overlap.• Calculated as tolling from beginning of CSED/Bankruptcy time frame until the end of the tolling event (including

additional days).

The tolling event begins after the start of the CSED/Bankruptcy time frame and before the current CSED/Bankruptcy time frame.

• This scenario tolls.

The tolling event starts after the end of the CSED/Bankruptcy time frame.

• This scenario does not toll.

There are four scenarios.

**See Next Slides for Visual Examples

33

34

6/17/2021

18

Start Of Tolling Events


Polling Question #4


35

36

6/17/2021

19

3-Year Rule


The taxes were due at least three years before the bankruptcy filing including valid extensions.

•The due date for individuals is April 15 and extensions are October 15.• I have not seen any case law on the Saturday, Sunday, Legal Holiday Rule affecting the due date

in regards to bankruptcy, but that does not mean there is not a case or the rules will change in the future.

Tolling Events

•Prior Bankruptcies•Tolls for the duration of the bankruptcy plus 90 days.

•Collection Due Process Hearing•Tolls for the duration of the hearing plus 90 days.

3-Year Rule Equitable Tolling


Prior Bankruptcies

• Tolls for the duration of the bankruptcy plus 90 days.


Collection Due Process Hearing

• Tolls for the duration of the hearing plus 90 days.

• Tolls for the duration of the hearing plus 90 days.

Offer In Compromise

• Does not toll the 3-Year Rule.

• Does not toll the 3-Year Rule.

37

38

6/17/2021

20

2-Year Rule


The tax return was filed at least 2 years before the filing.• This is the most complicated of the five rules/criteria regarding non-

priority debt.• This gets complicated because “What qualifies as a tax return” needs

to be established. This will be discussed on an upcoming slide (The Beard Test).

Tolling Events• None

2-Year Rule Equitable Tolling


Currently nothing tolls the 2-Year Rule.

The courts could change their

interpretation of the law at any time and

start applying tolling.

In the IRS Bankruptcy Presentation from the 2013 IRS Forum the presentation states:•“Prior bankruptcy filing extends 3-year rule plus 90 days, 240-day rule plus 180 days (under literal reading of statute), and 2-year rule with no additional time”• I have not found this tolling

position in any other literature.

• This is just an example of different interpretations of the same code.

39

40

6/17/2021

21

240-Day Rule


The tax was assessed at least 240 days prior to the filing including valid extensions.

Tolling Events• Prior Bankruptcies

• Tolls for the duration of the bankruptcy plus 90 days.• Collection Due Process Hearing

• Tolls for the duration of the hearing plus 90 days.• Offer In Compromise (OIC)

• Tolls for the time the OIC is pending and if accepted tolls for the duration of the OIC.• OIC tolls for an additional 30 days after the duration.• I have read that if the OIC starts before the assessment it does not toll. This is a decision for the

bankruptcy attorney.

240-Day Rule Equitable Tolling


Prior Bankruptcies


Collection Due Process Hearing

• Tolls for the duration of the CDP hearing plus 90 days.

Offer In Compromise (OIC)

• Tolls for the time the OIC is pending and if accepted tolls for the duration of the OIC.

• OIC tolls for an additional 30 days after the duration.

41

42

6/17/2021

22

Tax Bankruptcy Discharge Flow Chart

Polling Question #5


43

44

6/17/2021

23

Evaluate Taxpayer’s Eligibility For Tax Dischargeability


Determine which years have tax debt.•Check the Account Transcript, Separate Assessment, & Civil Penalty Transcripts.•Also need to check if there is an EIN for Payroll/Unemployment returns and request 940, 941, 943, 944, and/or 945 transcripts.

Confirm the taxpayer is compliant (compliant for bankruptcy not IRS Collections).•Determine if the returns past the Beard Test.

Is the debt secure?•Check for Tax Liens.

Is the debt priority or non-priority?•For each year with tax debt calculate the 3-Year & 240 Day Rules.

Is the debt dischargeable or non-dischargeable?•For each year with tax debt calculate the 3-Year, 2-Year, & 240 Day Rules.•Check for Tax Fraud and Willful Evasion.

Check to see if the tax return was late filed.•If an SFR is present determine if an original return was filed before the SFR was assessed.

Calculate the CSED Dates and verify with the IRS.

Evaluate other tax resolution options.

IRS Transcripts To begin the evaluation of a taxpayer’s eligibility for bankruptcy the IRS

Account Transcripts should be acquired. Optionally the IRS TXMODA transcript could be obtained.

The TXMODA transcripts are not available electronically and can be difficult to obtain.

Try calling the Practitioner Hotline (PPL/PPS) and ask for them. Try a Freedom Of Information Request (FOIA) (Only if you

cannot get it over the phone). You may need to go to the FOIA appeal.

The TXMODA transcripts will have the IRS CSED’s and all the closing codes that do not show in the Account Transcripts that are needed to determine tolling events.


45

46

6/17/2021

24

IRS Account TranscriptsThe IRS Account Transcripts are the primary reference a bankruptcy attorney should use when manually calculating the Discharge Dates.

Remember the account transcript by themselves are usually not considered evidence in tax court (and possibly bankruptcy court). From Grauer v. Commissioner, T.C. Memo. 2016-52 (Mar. 22, 2016) - As the court noted, the IRS’s “only evidence that such an agreement exists is an account transcript that [it] concedes is inaccurate and an indecipherable and unconvincingly explained collection of numerical codes.”


Grauer v. Commissioner, T.C. Memo. 2016-52 (Mar. 22, 2016) The important takeaway from this case was the taxpayer just had to prove the

IRS attempted to collect after the ten years. After that the burden of proof shifted to the IRS to prove they had valid statutory reason to extend or toll the CSED.

The taxpayer does not need to disprove the tolling event. The IRS needs to establish it and the taxpayer can challenge their evidence. The transcript was not considered evidence in this case as stated in the previous slide.

This also brings into play not “Did the tolling event happen?”, but instead “Can the IRS prove the tolling event happened?”

A recent TIGTA report determined that 10.6% of tolling events reviewed were not properly documented to justify tolling.


47

48

6/17/2021

25

Is There Income Tax Debt?

IRS Income Tax Debt should appear on the IRS Account Transcripts. Make sure that you also obtain the Separate Assessment transcripts and the

Civil Penalty transcripts. These are often overlooked.

Also check for existing IRS audits/exams as they could assess additional taxes.


Is The Taxpayer Compliant?Tax filing compliance for bankruptcy is different than for IRS Collections. IRS Collections usually defines tax compliance as having filed returns for the past

6 years. For Chapter 7 there is no specified requirement, but I believe it is up to the local

bankruptcy trustee. Chapter 13 requires the past four years of returns be filed.

The Bankruptcy Code requires Chapter 13 debtors to file all required tax returns for the years ending within 4 years of the debtor’s bankruptcy filing.

Unagreed SFR’s are not consider tax returns in reference to bankruptcy law. (Beard Test discussed later)

In order to be considered a tax return for bankruptcy the return must past the Beard Test.


49

50

6/17/2021

26

Compliance► For collections the IRS requires filing compliance for the past 6 tax years, current plus prior 5.1

► A tax year is considered compliant if either an original return is filed or a Substitute For Return (SFR) is filed.

► Check the transcript for the following transcript codes:― 150-Tax Return Filed (Indicates an Original was filed).― 150-Substitute tax return prepared by IRS (Indicates an SFR was started).

This is frequently interpreted by the IRS that after January 1st it is the current year and prior 5 years. The current year is considered compliant if not filed before the due date or if a timely filed extension is submitted. There are exceptions, this is an administrative policy not IRM/IRC.

RO’s can also interpret it to be prior 6 years and it switches on the primary filing date.Example. Up until April 15 of this year (if it was normal) taxpayer would need to have filed 2014 through 2019. After April 15 it would 2015 through 2020.1 IRS IRM 5.1.11.2.3.1.1 (01-15-2010) Documentation of Compliance

What Qualifies As A Tax Return


A timely filed 1040.

An agreed upon SFR IRC Section 6020(a) (In most Circuits)

• This is basically an SFR where the taxpayer signs agreeing to the

assessment.

A late filed 1040 that is filed prior to an unagreed SFR IRC Section 6020(b) assessment.

In some Federal Court Circuits late filed returns (even if one day late or with reasonable

cause) do not qualify based on the McCoy Ruling. More on this

in the upcoming slides.

51

52

6/17/2021

27

Polling Question #6


The Beard Test

54

The Beard test comes from the case Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (6th Cir. 1984) under which a “return” must, (1) purport to be a return; (2) be executed under penalty of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax

law.Some courts have ruled that an original return filed after an SFR Assessment do not pass part 4 of the Beard Test. Since they do not pass they are not considered returns and the tax for that year is not dischargeable.

Presentation Note: As a non-attorney all the tax pro can do is advise the attorney if an original was filed pre-SFR assessment. It is up to the attorney to determine the course of action.


53

54

6/17/2021

28

The McCoy Ruling

55

On January 25, 2012 the 5th Circuit Court of Appeals ruled on Linda McCoy vs Mississippi State Tax Commission that a late filed return did not meet the definition of a return under the 11 U.S.C. § 523(a)(1)(B)(i)

This case was about a state tax but it has since been applied to any income taxes including Federal Tax.

The IRS still recognizes late filed returns and the 2-Year Rule but the courts can decide on their own.

Even if the IRS does not pursue a McCoy ruling the court may as well as the states.

The Federal Circuits that recognize McCoy interpret a return even one day late as not a return.


Was an Original Return Filed Pre-SFR Assessment?

This is very difficult to determine. Thanks to Morgan King for discovering and providing an IRS Memo that addresses

this specific question (See Handout).


55

56

6/17/2021

29

IRS Memo SBSE-05-0911-078 The memo is dated September 28, 2011 and the subject is Determining

Dischargeability of Late Filed Returns in Which a Substitute for Return was Prepared under IRC § 6020(b) You should provide this memo to any bankruptcy attorneys you work with. To summarize the memo if a TC 976, 977 or 610 is received the date of the

transaction is the received date and it is pre-SFR Assessment. If those transactions are not present a FOIA can be submitted requesting the

TXMODA transcript and any account notes which may indicate a return was filed. (The IRS may have received a return and not coded it correctly).


What About an Agreed Upon SFR?

An SFR under IRC § 6020(a) is considered an “An Agreed Upon SFR”. One indication of an Agreed Upon SFR is a TC Code 599 with a cc 89. (cc =

Closing Code). The closing codes are not on the regular account transcript they are on

the TXMODA. Sometimes these can be acquired from PPL and other times they require a FOIA.

This rarely happens. I talked to a veteran former IRS employee who advised he never saw an “agreed” upon SFR in his 20 plus years.


57

58

6/17/2021

30

Is The Debt Secured?To determine if tax debt is secure the account transcripts need to be checked if there is a lien.


A Transaction Code (TC) 582 Lien placed on assets due to

balance owed indicates a lien unless there is a 583 Lien

released or 583 Lien removed on the same date or later than

the initial lien.

If no TC 582 exists or if it does exist but there is a TC 583 on

the lien date or later then there is no lien.

The TC 582 indicates the Notice of Federal Tax Lien (NTFL) has

been filed.

If there is an active lien then the debt is secured.

Secured debt can be discharged in bankruptcy, but the lien

survives and if the taxpayer sells any property covered by the lien

the IRS can make a claim.

Is the Tax Debt Dischargeable? The IRS Insolvency Unit will generally not tell a taxpayer or their attorney when

the debt becomes dischargeable prior to bankruptcy filing. WARNING!!! If filing a Chapter 7 and the tax debt is determined to be Non-

Dischargeable Debt there are usually no do-overs. If it is determined that a mistake was made determining if the tax debt was

priority the court generally does not allow a withdraw and then re-filing later to meet the requirements.

There may be exceptions to this and that is what the bankruptcy attorney can determine.

One strategy that some attorneys have advised is to file a Chapter 13 to have the IRS Insolvency Unit determine the dischargeability dates and then withdraw the Chapter 13 and file a Chapter 7 or convert it from one to another.


59

60

6/17/2021

31

Polling Question #7


3rd Party Programs That Assist With Determining Bankruptcy Discharge DatesThe following screen shots are

from a Tax Help Software Transcript Analysis Report.These calculations were

completed seconds after the transcripts were downloaded from the IRS.The report accurately

calculates


Due date (including extension)

Original return filed date SFR filed date

Taxpayer compliance

Debt breakdown by year

Base bankruptcy discharge dates

CSED’sLists all

assessments including balance

Chronological IRS transactions

Lien status Collection’s status Active exam check

61

62

6/17/2021

32

Main THS Report DashboardWas a return filed? Are their active liens? Is taxpayer under exam?

Was there an extension & date of extension?

Is there IRS Tax Debt by Year.

Total tax debt (Under the 1040).

ASED/RSED DashboardWas a return filed and what

was the date of filing?What is the due date adjust

for possible extensions?

63

64

6/17/2021

33

CSED DashboardList of each assessment.

Assessment dates.

Original assessed amount.

Remaining balance of each

assessment.

Calculated CSED for each assessment.

Bankruptcy Dashboard


Base bankruptcy discharge dates (3 date rules of bankruptcy). Estimated base

bankruptcy discharge date (without tolling).

Note: The bankruptcy discharge dates in the THS reports are the base dates

without tolling. There is not enough data on the account transcript to calculate

tolling events for bankruptcy.

The THS Bankruptcy Calculator allows for the calculation of Bankruptcy Discharge

dates with tolling.

65

66

6/17/2021

34

Presentation Note Remember as a non-attorney tax professional’s role is to assist the

bankruptcy attorney with interpreting the tax data. It is the bankruptcy attorney’s responsibility to verify and review any data or calculations you provide in addition to interpreting the existing case law and how it affects the taxpayer’s bankruptcy filing.


Polling Question #8


67

68

6/17/2021

35

Calculate the 3-Year Rule


Determine Due Date For individuals this is pretty simple (But remember nothing is really “Simple”

with the IRS).


No Extension

• April 15th

• COVID Changes• 2019 1040

due July 15th

• 2020 1040 due May 17th

Taxpayer out of the country

• (Taxpayers living abroad-automatic extension) = June 15th

Extension

• October 15th

• (In tax year 2006 extensions were changed from four months to six. Just an FYI if working really old cases).

Exceptions

• Taxpayer out of the country

• Military in combat zone

69

70

6/17/2021

36

Individual Due Dates3.30.123.6.1.6 (01-01-2018)Domestic Form 1040 Series OTFP (AUSPC, FSPC, KCSPC, OSPC Only) (Programs 43110, 43130, 44110 and 47130) Processing Specifications1. STATUTORY DUE DATES for Form 1040, Form 1040-A and Form 1040-EZ:

• April 15• June 15 (Taxpayers living abroad-automatic extension)• October 15 (If Extension Request is filed timely - April 15)

Presentation Note: Unsure how a natural disaster extension affects the due date interpretation for bankruptcy. This would benefit the taxpayer if challenging a late filed return where there may have been an automatic extension for taxpayers in Federally Declared Disaster area. This is for the attorneys to interpret. More information in the 2-Year Rule section.


IRS IRC Reference Due DatesU.S. Code › Title 26 › Subtitle F › Chapter 61 › Subchapter A › Part V › § 6072-Time for filing income tax returns

(a) General ruleIn the case of returns under section 6012, 6013, or 6017 (relating to income tax under subtitle A), returns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15th day of the fourth month following the close of the fiscal year, except as otherwise provided in the following subsections of this section.


71

72

6/17/2021

37

Due Dates Affected by COVID The extended due dates/timely filing dates for 2019 and 2020 (COVID) will not be determined until 2023 at the earliest for Bankruptcy since that is when it will become an issue.

Extended Due Dates (without taxpayer filing an additional extension):2019 = July 15, 20202020 = May 17, 2021 (May 15 was Saturday so SSLH makes it May 17)

The base 3-Year Rule dates will probably be as follows:2019 = July 15, 2023 (probably July 17, 2023 since July 15 is a Saturday)2020 = May 17, 2024


Taxpayer Out of Country You may be allowed an automatic 2-month extension of time to file your return and pay any

federal income tax that is due. You will be allowed the extension if you are a U.S. citizen or resident alien and on the regular due date of your return: You are living outside of the United States and Puerto Rico and your main place of business

or post of duty is outside the United States and Puerto Rico, or You are in military or naval service on duty outside the United States and Puerto Rico

If you use a calendar year, the regular due date of your return is April 15, and the automatic extended due date would be June 15. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Even if you are allowed an extension, you will have to pay interest on any tax not paid by the regular due date of your return.

How To Get The ExtensionTo use this automatic 2-month extension, you must attach a statement to your return explaining which of the two situations listed earlier qualified you for the extension. To get the additional four months the 4868 must be filed prior to June 15th.


73

74

6/17/2021

38

Extensions Related To Combat Zones Or Contingency Operations

There are numerous extensions and exceptions extended to Military Members and non-Military Members who are supporting Combat Zones or Contingency Operations.

Refer to IRS Publication 3 for details.


Saturday, Sunday, Legal Holiday Rule (SSLH)

25.6.1.6.15 (10-01-2012)When a Document Is Treated As Filed Under the IRC

3. Saturday, Sunday, or Legal Holiday (SSLH) Rule.1. In general, when the last day for filing falls on a Saturday, Sunday or legal holiday and the taxpayer actually filed on the next succeeding day, the tax return or claim is considered to be timely filed on that next succeeding day. Section 7503 does not deem the filing to be made on the prescribed due date when it is actually received on the next succeeding day. For example, a Form 1040 received on Monday, April 16 (a legal holiday day) is considered filed on April 15 (is the received date). See Rev. Rul. 81-269, 1981–2 C.B. 243 (at Situation 2).


75

76

6/17/2021

39

IRC For SSLHTitle 26 › Subtitle F › Chapter 77 › § 7503- Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday When the last day prescribed under authority of the internal revenue laws for

performing any act falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday. For purposes of this section, the last day for the performance of any act shall be determined by including any authorized extension of time; the term “legal holiday” means a legal holiday in the District of Columbia; and in the case of any return, statement, or other document required to be filed, or any other act required under authority of the internal revenue laws to be performed, at any office of the Secretary or at any other office of the United States or any agency thereof, located outside the District of Columbia but within an internal revenue district, the term “legal holiday” also means a Statewide legal holiday in the State where such office is located.


Tax Deadline vs Due Date The Due Date is the date when the return is due. The deadline is the date you have to file for the return to be considered

timely filed. Example in 2018 (Tax Year 2017) The deadline is April 17, instead of April

15, because of the Emancipation Day holiday in the District of Columbia—even if you do not live in the District of Columbia. When the due date (including extended due dates) falls on a Saturday, Sunday or legal holiday, a return filed on the next business day is considered timely.

Timely filed extensions extend the Due Dates for purposes of bankruptcy calculations.


77

78

6/17/2021

40

Polling Question #9


Calculate the2-Year Rule


79

80

6/17/2021

41

Determine Return Filed Date This is the date the accepted return was received by the IRS. There are 3 different scenarios to calculate the return filed date. If there is no Substitute For Return (SFR) on the account transcript:

Simply look at the account transcript. Just above the transactions:

“RETURN DUE DATE OR RETURN RECEIVED DATE (WHICHEVER IS LATER)” This is the return filed date The transaction code 150 TAX RETURN FILED is NOT the return filed date. It

is the processing date. An SFR is present. (detailed instructions on upcoming slides)


Return Filed Date is April 15th.

Notice the Return Filed Date transaction date is the Processing Date not

the Filed Date.

81

82

6/17/2021

42

Determining the Return Filed Date When An SFR Is Present


Step 1 – Determine if an SFR is Present

• There will be a transaction “150 Substitute tax return prepared by IRS”.

• This description can vary but the TC will be 150 and the description will contain the word “substitute” indicating the presence of an SFR.

Step 2 – Check for Indicating Transactions

• For a TC 976 Duplicate return filed, 977 Amended return filed or 610 Payment with return (form) (year & quarter) the transaction date is the received date

If an Original Return is Filed After an SFR Assessment and More Tax Is Owed According to the handout memo (SBSE-05-0911-078):

The original assessment amount is NOT dischargeable. The additional tax from the original return filing IS dischargeable.


83

84

6/17/2021

43

Polling Question #11


Calculate the240-Day Rule


85

86

6/17/2021

44

Determine Assessment Dates

This is the only bankruptcy rule date that can vary within a year. If multiple assessments are made in the same tax year they share the same

Due Date and Filed Date (thus the same 3-Year & 2-Year Rules). The 240-Day Rule will be the different for each assessment made on different dates. This is usually the result of an audit. The 290/300 Additional tax assessed Transaction Codes on the Account Transcripts or an amended return.


Base Discharge Dates Before TollingOnce the Due Date, Filing Date and

Assessment Dates have been determined the tax pro should calculate the base bankruptcy discharge dates (dates without tolling events applied).

Once the base bankruptcy discharge dates are calculated the tolling events need to be calculated and applied to determine the priority status of the debt.


3-Year Rule

Add 3 years to the Due date.

2-Year Rule -

• Add 2 years to the original return filed date.

240-Day Rule

• Add 240 days to each assessment date.

87

88

6/17/2021

45

Tolling Event Calculations

If two or more tolling events overlap the days in the overlap are only tolled one time. The CDP tolls from the start date until the end date. The Bankruptcy only tolls from the end of the CDP until the end date. The Pending IA does not toll because it overlaps completely with the previous events.

Tolling Event Start Date Duration End Date Days Tolled Overlap Days Not TolledCDP 12/1/2005 427 2/1/2007 427 0Bankruptcy 7/1/2006 609 3/1/2008 394 215Pending IA 10/1/2006 426 12/1/2007 0 426


Examples of Tolling Affecting Each Bankruptcy Discharge Rule

The following examples show how the three bankruptcy tolling events affect the different rules with visuals.


89

90

6/17/2021

46

3-Year Tolling Example

Return Due Date for 2014 Tax Year = 10/15/2015 A timely extension was filed.

Base 3-Year Rule = 10/15/2015 + 3 years = 10/15/2018 The prior bankruptcy does not toll since the tolling event ends before the due date. The CDP tolls from 10/15/2018 (since the due date is after the CDP start date) to

2/26/2017 for a total of 500 days. The OIC does not toll the 3-Year Rule. The 3-Year Rule date in this example is the base 3-year rule date 10/15/18 + 500 days

= 2/27/2020


3-Year Rule Visual


91

92

6/17/2021

47

2-Year Tolling Example

Return Filed Date for 2014 Tax Year = 4/15/2015 (Actually filed on 2/1/2015) A timely extension was filed.

Base 2-Year Rule = 4/15/2015 + 2 years = 4/15/2017 There are no tolling events that extend the 2-Year Rule (subject to change

with new court cases) The 2-Year Rule date = 4/15/2017


2-Year Rule Visual


93

94

6/17/2021

48

240-Day Tolling Example

For the 2014 Tax Year the taxpayer received a refund with their return, but after being audited received an assessment on 6/15/2016 (only assessment).

Base 240-Day Rule = assessment date 6/15/2016 + 240 days = 2/10/2017 The prior bankruptcy does not toll since the event ends before the assessment date. The CDP starts before the assessment date and tolls from the assessment date until

2/26/2017 for a total of 256 days. The OIC tolls from 2/26/2017 (due to overlap with CDP) to 8/30/2017 for a total of

185 days. The 240-Day Rule date in this example is the base 240-Day Rule date 2/10/2017 + 441

days = 4/27/2018.©2021 Tax Mentor Group, LLC dba Tax Mentor All Rights Reserved

240-Day Rule Visual


95

96

6/17/2021

49

Determine the Minimum Non-Priority Discharge Date The minimum non-priority dischargeable discharge date is the greater of the

three date rules; 3-Year, 2-Year & 240-Day Rules. Example:

3-Year Rule Date = 2/27/2020 2-Year Rule Date = 4/15/2017 240-Day Rule Date = 12/11/2015 (Initial assessment with return) 240-Day Rule Date = 4/27/2018 (Additional assessment from exam on

12/15/17 with return)

For all the assessments the minimum non-priority dischargeable date = 2/27/2020


Check For Tax Fraud or Willful Evasion The only indicator on the transcript that indicates tax fraud is the Transaction

Code for Fraud Penalties: 320 Penalty for fraud

There are no indicators of Willful Evasion on the account transcript. A FOIA request may be an option, but these are difficult to establish since the

definition for both is subjective and lawyers are involved.

Presentation Note: The lack of any indicators does not mean that they do not exist. Tax fraud can exist when no fraud penalty has been assessed.


97

98

6/17/2021

50

Is The Return Late Filed?

If the Return Filed Date is after the Return Due Date then the return is late filed.

This comes into play in those Federal Circuits that observe the McCoy Case. If the return is late filed and McCoy does not apply then the Beard Test needs

to be applied.


When Is The CSED Collection Statute Expiration Date (CSED) (Reminder)

The CSED defines how long the IRS has to collect tax for a specific assessment.

The CSED is calculated as 10 years after the assessment date. Each assessment carries it’s own CSED. The CSED can be extended by tolling events.

The tolling events for the CSED are similar to the bankruptcy tolling events, but different.

As a bankruptcy strategy the attorney should determine when the debt will expire.


99

100

6/17/2021

51

Other Resolution Options Available?


Are income taxes the primary reason for the bankruptcy? How close is the CSED.

Does the taxpayer qualify for an Offer In Compromise (OIC)

or Partial Pay Installment Agreement (PPIA)?

Does the taxpayer qualify for Currently Not Collectible (CNC)?• The Monthly Disposable Income (MDI)

is calculated during the OIC evaluation. If it is close to zero CNC may be an option.

Does the taxpayer qualify for an Installment Agreement

(IA)?Does the taxpayer qualify for

innocent spouse?

State & Local Income Taxes

Don’t forget these rules also apply to the state and local taxes.


101

102

6/17/2021

52

Polling Question #12


QUESTIONS?

TaxMentor.com&

[email protected]

103

104

Documents

Ultimate Bankruptcy & Federal Tax Workshop...6/17/2021 2 Schedule Day 1 June 16th 11am – 2pm Eastern 10-minute break every hour Day 2 June 17th 11am – 2pm Eastern 10-minute break